Leasing smarts

 

Lease, contract, keys, propertyThe past 12 months has seen the collapse of several high profile Australian retailers, all of whom have blamed ongoing rent hikes as a contributing factor to their demise.

Snowgum, Kirrily Johnson, Lisa Ho, and jeans queen, Bettina Liano, are just some of the names that fell into the red in 2013.

But while retailers point the finger at landlords, experts say that 2014 will be a tenant’s market, with the bulk of the bargaining power resting in their hands.

With the help of some of the industry’s best, Inside Retail Magazine has compiled a list of tips to keep in mind when negotiating leases.

1. The devil’s in the detail

As the old saying goes, the devil’s in the detail. Getting the right advice and researching your leasing terms is crucial when negotiating a lease or renewing an existing contract. For many retailers debuting in a new site, undertaking market research, such as average rent prices in the area, may help strengthen bargaining power.

Ange Kondos, MD of The Leasewise Group, says the market has seen a rent decline of around 15 per cent in the past 12 months, which has enabled a power shift between landlord and tenant, ultimately giving retailers more negotiating control over lease terms and incentives.

“It’s a good time to grow, and if you’re renewing it’s a good time be armed with the right information so that you can get the best out of it,” Kondos told Inside Retail Magazine.

While incentives are mainly included in new contracts, if you are a retailer who is setting up shop in a new site, being in tune with current market conditions and having a clear financial business strategy, will strengthen your negotiating tactics.

If seeking to obtain a fitout contribution, retailers are encouraged to create a specific fitout proposal that includes a cost and time breakdown.
As there’s more flexibility than ever before, don’t compromise your business strategy for something that looks good on paper.

As Kondo says, “don’t agree to anything unless the deal stacks up to your business plan. In the past people thought they needed locations to get a market presence and drive franchise awareness, but those days are long gone.”

In recent years, redevelopments and an increasingly volatile retail environment have lead to retailers bucking the trend of traditional leasing tenures, now negotiating shorter term leases at the time of renewal, usually between one to two years.

Last year, Lease Information ervices (LIS) analysed lease patterns in NSW, Queensland, and ACT shopping centres. The study compared its findings to a similar study undertaken by the Productivity Commission in 2008.

According to the 2008 report, more than 60 per cent of leases in NSW and QLD were grouped in the five year tenure bracket, however, in 2012 the ratio decreased to 35 per cent for both states.

While the proportion of shorter leases (less than five years) has shown an increase over the past four years, there was also a spike in leases of more than five years across both states, mainly from larger format tenancies, such as restaurants, as a result of more costly fitouts.

2. Know your neighbours

Setting up shop in a centre surrounded by the likes of David Jones or Woolworths has major pulling power for retailers hesitant to sign on the dotted line, but can you be guaranteed they are there to stay?

“Next year and in the years ahead you’re going to see some risks around major tenants within malls,” says Lee Trevena, CEO of LeaseEagle.

Trevena, who has worked with retail clients including Noni B and SpecSavers, is forecasting unpredictability throughout Australian shopping centres in the coming years as some of the country’s biggest retail brands begin to downsize store footprints and reshape instore concepts.

He notes that some shopping centres are already beginning to see some fragility in the makeup of their malls due the increasing amount of holdover tenants, and warns retailers to be aware of what’s happening around them.

“There’s always a big focus on rent reviews,” says Trevena.

“Normally the landlord will want to try and do a long term renewal because that adds more value to the asset. But, if there’s risk that the income will go down because the tenant won’t agree to the renewal increase or the tenant wants a decrease on their renewal, the landlord will keep the tenant on holdover, meaning the rent will stay the same.

“Because of this we’re now seeing a higher proportion of retail tenants on holdover. There may be as many as 150 retailers in a mall but 20 per cent are holdover, meaning they could leave at any moment – so retailers need to be aware of what’s going on.”

Before signing or renewing a lease, retail operators need to have a very clear awareness from the agent or the landlord of who the anchors in the mall are and the expiry dates of their leases.

Trevena advises: “Find out the time horizons of the drivers in the mall and ask, can you get assurance on the lease commitments from the majors?

If a major tenant or a number of tenants reduce, will it affect trade? And, do you have the right protection in place, or are you eligible for compensation should the foot traffic decrease?

“As a retail tenant in these malls you have to be really aware of what’s going on. Keep in contact with other retailers, store managers, and those heavily involved with the centre, because if you’re in a small centre and five or 10 retailers leave, a mini-major shuts down, or a major closes its store, then you have some real risks about your business and you need to be aware of that.”

meeting, business, contract, negotiation3. Everything is negotiable

“Negotiating is negotiable,” says Leasewise’s Kondos.

“Every single thing is negotiable. In the past, particularly shopping centres landlords or institutional owners would have said rent is fixed and refuse to pay for specific  services, but it’s now very much a tenants market.

“Most of the major landlords and larger agents are aware of that, so retailers are getting a lot more in terms of fitout incentives and or rent free periods,” Kondos says.

Lease incentives are generally only available for new tenants and will depend on the centre. Unfortunately for high street traders incentives can still be
a rarity, with landlords mainly offering rent free periods of around five per cent, which on average equates to around three months for a five year lease.

Food operators and restaurants tend to receive the biggest incentives due to higher fitout costs and longer leasing periods.

According to Simon Fonteyn, MD of LIS, the average retail lease has 15 negotiation items other than base rent.

These items include the lease term, permitted use, shop area, rent escalations, outgoings recoveries, percentage rent, promotion levy percentage, security deposits, personal/directors guarantees, make good provisions, incentives, fitout periods, redecoration clauses, options, and end of lease issues/holdover provisions.

In order to get the best deal retailers should compare with other retailer tenancy agreements.

“There’s different incentives for different retailers,” says Trevena, who suggests retailers should focus on incentives that help reduce occupancy costs.
“Occupancy costs are the most important, and whatever you can do to reduce your occupancy costs is just as important.”

Trevena points out retailers should also aim for incentives that help reduce instore footprints.

“If you want a renewal, try and get a 10 to 15 per cent reduction on your store footprint. Whether this be through more storage, improving your supply chain, or delivery into store. Whatever it is, it’s a simple way of trying to keep the same stock level but reducing your footprint. It’s all about managing your costs – landlords also don’t want more vacancies, so the harder you request the more you will be able to negotiate.”

4. Play it smart

Before the deal is signed, sealed, and delivered, Fonteyn urges retailers to make sure their site selection is right for their business. “There’s a lot of mistakes made around site selection,” he says.

“Don’t just assume that because there’s a lot of foot traffic that the centre will be a desirable location for your business – people shop for different reasons and at different times.

“If you’re a fresh food player you’re best co-locating in a part of the centre with similar retailers rather than going for maximum foot traffic.

“Retailers also need to understand the dynamics of the catchment area – does it have the right potential for your business? Is there population growth?
And, are there any barriers to entry?”

While playing it smart is key, so too is playing it safe when it comes to location, meaning retailers should always have a plan B for their business when undertaking negotiations.

“This may be easier said than done, particularly if you have invested heavily in fitout, however, you maybe better off cutting your losses and exiting to a more viable site than committing to another long term deal only to find that you can’t pay the rent and need to get out in the future,” says Fonteyn.

Store owners should be mindful of landlords apprehensive or unwilling to negotiate, as this red flag may indicate the landlord has other plans.

“If you can’t openly and transparently negotiate your lease then you need to really be conscious of the fact that the landlord may have plans to redevelop or relocate.

“This doesn’t mean that you have to take whatever deal comes forward, it just means that you need to do your research and planning, and see if there are other opportunities in the mall,” says Trevena.

Merchants located in high risk areas prone to floods or bushfires should ensure that their contracts have watertight insurance clauses. “Making sure you have the right protection in the reinstatement clauses in the leases is really critical,” he recommends.

5. The year ahead

While market research is paramount in the early stages of negotiation, it is also important to make it an ongoing activity.

Using analytic tools such as Leasewise’s Rentwise report can estimate and cross reference leasing rates for shopping centres across the country.

“There is certainly data available where you can cross reference information on every single shopping centre in Australia, on what its productivity is, and what rents rate should be,” says Kondos.

While international retailers such as H&M and Uniqlo have not been shy about their plans for the Australian market, LIS predicts there will be more than 30,000sqm of fashion retail opening on Australian shores in 2014, not including the expansion of current overseas heavyweights Topshop and Zara.

“2014 will still be a cautious year for most retailers, as there are still some concerning signs around employment, business investment, excess inventory, and consumer cautiousness,” says LIS chief, Simon Fonteyn.

“Existing smaller fashion Uniqlo’s proposed Melbourne store retailers will be most affected [by internationals] and will look at some rationalisation of store numbers and keeping their best performers. Large chain fashion retailers with strong balance sheets will be in the box seat to drive the best deals.”

LIS predicts quick service restaurants will remain strong next year, with expansion mainly in foodcourts and restaurant precincts.

The pharmacy sector is forecast to come under pressure in 2014, with larger chains such as Chemist Warehouse continuing to expand their portfolios, often taking over independent pharmacists in good positions.

Rental deals will remain sharp for the jewellery sector, with only a few jewellers expanding in 2014, while the homewares market is likely to improve, with smaller chains set to expand off the back of the consistently strong property market.

Trevena says that while next 12 months will be a period of consolidation for most, it will also be a time for opportunity.

“The leasing market will remain fairly soft, but that’s for good retailers and opens up good opportunity,” he says.

“If you’re a strong retailer, got good negotiators, and a good understanding of what you’re doing then this really opens up opportunities.”

This article first appeared in Inside Retail Magazine’s December/January 2014 issue. To subscribe, click here.

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